FORM 10-Q

|X|

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2004

OR

|  | 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___

Commission

IRS Employer

File

State of

Identification

Number

Registrant

Incorporation

Number

1-7810

Energen Corporation

Alabama

63-0757759

2-38960

Alabama Gas Corporation

Alabama

63-0022000

Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of November 3, 2004

Energen Corporation

$0.01 par value

36,442,118 shares

Alabama Gas Corporation

$0.01 par value

  1,972,052 shares

ENERGEN CORPORATION AND ALABAMA GAS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

Page

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

(a) Consolidated Condensed Statements of Income of Energen Corporation

 3

(b) Consolidated Condensed Balance Sheets of Energen Corporation

 4

(c) Consolidated Condensed Statements of Cash Flows of Energen Corporation

 6

(d) Condensed Statements of Income of Alabama Gas Corporation

 7

(e) Condensed Balance Sheets of Alabama Gas Corporation

 8

(f) Condensed Statements of Cash Flows of Alabama Gas Corporation

10

(g) Notes to Unaudited Condensed Financial Statements

11

Item 2.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

21

Selected Business Segment Data of Energen Corporation

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

30

PART II: OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 6.

Exhibits

31

SIGNATURES

32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

ENERGEN CORPORATION

(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,

(in thousands, except per share data)

2004

2003

2004

2003

Operating Revenues

Oil and gas operations

$  104,336

$   87,994

$  295,996

$  266,296

Natural gas distribution

62,162

58,147

410,108

373,534

     Total operating revenues

166,498

146,141

706,104

639,830

Operating Expenses

Cost of gas

26,545

24,966

205,574

179,045

Operations and maintenance

60,788

50,227

170,179

149,005

Depreciation, depletion and amortization

30,896

29,203

88,559

87,473

Taxes, other than income taxes

15,354

12,389

55,679

47,824

Accretion expense

613

459

1,635

1,419

     Total operating expenses

134,196

117,244

521,626

464,766

Operating Income

32,302

28,897

184,478

175,064

Other Income (Expense)

Interest expense

(10,515)

(10,153)

(31,527)

(31,709)

Other income

702

2,289

2,197

7,408

Other expense

(225)

(2,866)

(1,920)

(8,218)

     Total other expense

(10,038)

(10,730)

(31,250)

(32,519)

Income From Continuing Operations Before Income Taxes

22,264

18,167

153,228

142,545

Income tax expense

8,532

6,710

57,031

53,305

Income From Continuing Operations

13,732

11,457

96,197

89,240

Discontinued Operations, net of taxes

Income from discontinued operations

-

145

3

966

Gain (loss) on disposal

8

294

(5)

(382)

Income (Loss) From Discontinued Operations

8

439

(2)

584

Net Income

$    13,740

$11,896

$    96,195

$  89,824

Diluted Earnings Per Average Common Share

Continuing operations

$      0.37

$       0.32

$      2.63

$   2.51

Discontinued operations

-

0.01

-

0.02

Net Income

$        0.37

$  0.33

$        2.63

$   2.53

Basic Earnings Per Average Common Share

Continuing operations

$      0.38

$       0.32

$      2.66

$   2.53

Discontinued operations

-

0.01

-

0.02

Net Income

$     0.38

$  0.33

$     2.66

$  2.55

Dividends Per Common Share

$    0.1925

$    0.185

$   0.5625

$   0.545

Diluted Average Common Shares Outstanding

36,700

36,261

36,629

35,561

Basic Average Common Shares Outstanding

36,268

35,869

36,224

35,208

CONSOLIDATED CONDENSED BALANCE SHEETS

ENERGEN CORPORATION

(Unaudited)

(in thousands)

September 30, 2004

December 31, 2003

ASSETS

Current Assets

Cash and cash equivalents

$       4,511

$       2,127

Accounts receivable, net of allowance for doubtful
    accounts of $10,510 at September 30, 2004, and
    $9,852 at December 31, 2003

118,388

172,915

Inventories, at average cost

    Storage gas inventory

60,604

40,654

    Materials and supplies

7,675

7,677

    Liquified natural gas in storage

3,346

3,475

Deferred income taxes

58,125

38,145

Prepayments and other

76,526

25,073

    Total current assets

329,175

290,066

Property, Plant and Equipment

Oil and gas properties, successful efforts method

1,548,350

1,197,340

Less accumulated depreciation, depletion and amortization

360,725

310,368

    Oil and gas properties, net

1,187,625

886,972

Utility plant

927,430

883,225

Less accumulated depreciation

365,614

341,787

    Utility plant, net

561,816

541,438

Other property, net

5,419

5,041

    Total property, plant and equipment, net

1,754,860

1,433,451

Other Assets

Regulatory asset

19,650

18,082

Deferred charges and other

25,775 

39,833

    Total other assets

45,425 

57,915

TOTAL ASSETS

$   2,129,460 

$   1,781,432

CONSOLIDATED CONDENSED BALANCE SHEETS

ENERGEN CORPORATION

(Unaudited)

(in thousands, except share data)

September 30, 2004

December 31, 2003

CAPITAL AND LIABILITIES

Current Liabilities

Long-term debt due within one year

$      10,000

$      10,000

Notes payable to banks

213,000

11,000

Accounts payable

179,021

135,319

Accrued taxes

32,742

28,551

Customers' deposits

17,584

17,884

Amounts due customers

10,481

8,571

Accrued wages and benefits

26,740

24,957

Regulatory liability

65,761

54,146

Other

52,123

37,303

    Total current liabilities

607,452

327,731

Deferred Credits and Other Liabilities

Asset retirement obligation

34,149

26,515

Minimum pension liability

27,757

17,911

Regulatory liability

110,668

113,427

Deferred income taxes

76,803

33,200

Other

24,417

10,774

    Total deferred credits and other liabilities

273,794

201,827

Commitments and Contingencies

Capitalization

Preferred stock, cumulative $0.01 par value, 5,000,000
    shares authorized

- - 

- -

Common shareholders' equity

    Common stock, $0.01 par value; 75,000,000 shares authorized, 36,427,141 shares outstanding at September 30, 2004, and 36,223,531 shares outstanding at December 31, 2003

364

362

    Premium on capital stock

376,390

367,765

    Capital surplus

2,802

2,802

    Retained earnings

435,749

360,001

    Accumulated other comprehensive loss, net of tax

Unrealized loss on hedges

(66,110)

(21,714)

Minimum pension liability

(10,237)

(8,881)

Deferred compensation on restricted stock

(2,730)

(1,258)

Deferred compensation plan

24,120

17,063

Treasury stock, at cost (488,727 shares at September 30, 2004,
    and 415,869 shares at December 31, 2003)

(25,001)

(17,108)

    Total common shareholders' equity

735,347

699,032

Long-term debt

512,867

552,842

    Total capitalization

1,248,214

1,251,874

TOTAL CAPITAL AND LIABILITIES

$   2,129,460

$   1,781,432

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

ENERGEN CORPORATION

(Unaudited)

Nine months ended September 30, (in thousands)

2004

2003

Operating Activities

Net income

$     96,195

$     89,824

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation, depletion and amortization

88,559

88,400

    Deferred income taxes

50,783

40,804

    Deferred investment tax credits

(308)

(336)

    Change in derivative fair value

4,213

748

    (Gain) loss on sale of assets

182

(10,059)

    Loss on properties held-for-sale

-

10,404

Net change in:

     Accounts receivable

32,909

41,558

     Inventories

(19,819)

(34,556)

     Accounts payable

(16,826)

(25,146)

     Amounts due customers

(5,413)

1,026

     Other current assets and liabilities

12,107

(16,661)

Other, net

10,648

3,090

    Net cash provided by operating activities

253,230

189,096 

Investing Activities

Additions to property, plant and equipment

(132,197)

(153,960)

Acquisition

(262,825)

-

Proceeds from sale of assets

134

29,092

Other, net

(2,144)

636

    Net cash used in investing activities

(397,032)

(124,232)

Financing Activities

Payment of dividends on common stock

(20,447)

(19,236)

Issuance of common stock

5,216

41,648

Purchase of treasury stock

(510)

(339)

Reduction of long-term debt

(40,073)

(13,000)

Net change in short-term debt

202,000

(74,000)

    Net cash provided by (used in) financing activities

146,186

(64,927)

Net change in cash and cash equivalents

2,384

(63) 

Cash and cash equivalents at beginning of period

2,127

4,804 

Cash and Cash Equivalents at End of Period

$       4,511

$      4,741

CONDENSED STATEMENTS OF INCOME

ALABAMA GAS CORPORATION

(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,

(in thousands)

2004

2003

2004

2003

Operating Revenues

$ 62,162

$ 58,147

$410,108

$373,534

Operating Expenses

Cost of gas

27,190

25,534

207,073

180,828

Operations and maintenance

29,563

27,657

88,422

84,208

Depreciation

9,985

9,385

29,453

27,532

Income taxes

    Current

(9,604)

(10,164)

9,810

9,712

    Deferred, net

4,800

5,331

7,878

7,174

    Deferred investment tax credits, net

(84)

(112)

(308)

(336)

Taxes, other than income taxes

5,554

5,146

28,701

26,353

     Total operating expenses

67,404

62,777

371,029

335,471

Operating Income (Loss)

(5,242)

(4,630)

39,079

38,063

Other Income (Expense)

Allowance for funds used during construction

347

80

1,008

573

Other income

426

897

1,527

3,090

Other expense

(248)

(1,032)

(1,934)

(3,642)

     Total other income (expense)

525

(55)

601

21

Interest Charges

Interest on long-term debt

2,462

3,222

8,212

9,697

Other interest expense (income)

566

(126)

2,335

586

    Total interest charges

3,028

3,096

10,547

10,283

Net Income (Loss)

$ (7,745)

$ (7,781)

$ 29,133

$ 27,801

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands)

September 30, 2004

December 31, 2003

ASSETS

Property, Plant and Equipment

Utility plant

$   927,430

$   883,225

Less accumulated depreciation

365,614

341,787

    Utility plant, net

561,816

541,438

Other property, net

327

331

Current Assets

Cash and cash equivalents

4,119

1,440

Accounts receivable

    Gas

57,546

134,376

    Merchandise

1,816

1,210

    Other

2,335

1,018

    Affiliated companies

771

-

    Allowance for doubtful accounts

(9,600)

(9,100)

Inventories, at average cost

    Storage gas inventory

60,604

40,654

    Materials and supplies

4,408

5,527

    Liquified natural gas in storage

3,346

3,475

Deferred income taxes

15,865

17,650

Regulatory asset

1,276

251

Prepayments and other

68,187

22,056

    Total current assets

210,673

218,557

Other Assets

Regulatory asset

19,650

18,082

Deferred charges and other

4,491

19,285

    Total other assets

24,141

37,367

TOTAL ASSETS

$   796,957

$   797,693

CONDENSED BALANCE SHEETS

ALABAMA GAS CORPORATION

(Unaudited)

(in thousands, except share data)

September 30, 2004

December 31, 2003

CAPITAL AND LIABILITIES

Capitalization

Preferred stock, cumulative $0.01 par value, 120,000 shares
    authorized, issuable in series-$4.70 Series

$              -

$           -

Common shareholder's equity

    Common stock, $0.01 par value; 3,000,000 shares
       authorized, 1,972,052 shares outstanding at
       September 30, 2004, and December 31, 2003

           20

         20

    Premium on capital stock

31,682

31,682

    Capital surplus

2,802

2,802

    Retained earnings

224,576

215,869

    Total common shareholder's equity

259,080

250,373

Long-term debt

129,460

169,533

    Total capitalization

388,540

419,906

Current Liabilities

Long-term debt due within one year

10,000

-

Notes payable to banks

55,000

11,000

Accounts payable

37,764

56,020

Amounts due to affiliates

-

37,290

Accrued taxes

27,517

22,145

Customers' deposits

17,584

17,884

Amounts due customers

10,481

8,571

Accrued wages and benefits

6,980

6,247

Regulatory liability

65,761

54,146

Other

12,452

9,039

    Total current liabilities

243,539

222,342

Deferred Credits and Other Liabilities

Deferred income taxes

38,480

32,178

Minimum pension liability

13,026

6,988

Regulatory liability

110,668

113,427

Other

2,704

2,852

     Total deferred credits and other liabilities

164,878

155,445

Commitments and Contingencies

-

-

TOTAL CAPITAL AND LIABILITIES

$   796,957

$   797,693

CONDENSED STATEMENTS OF CASH FLOWS

ALABAMA GAS CORPORATION

(Unaudited)

Nine months ended September 30, (in thousands)

2004

2003

Operating Activities

Net income

$     29,133

$     27,801

Adjustments to reconcile net income to net cash

provided by (used in) operating activities:

    Depreciation and amortization

29,453

27,532

    Deferred income taxes, net

7,878

7,174

    Deferred investment tax credits

(308)

(336)

Net change in:

    Accounts receivable

53,790

39,873

    Inventories

(18,702)

(34,950)

    Accounts payable

(18,005)

(14,900)

    Amounts due customers

(5,413)

1,026

    Other current assets and liabilities

5,768

(12,422)

Other, net

6,414

123

    Net cash provided by operating activities

90,008

40,921

Investing Activities

Additions to property, plant and equipment

(40,991)

(40,966)

Other, net

(1,778)

307

    Net cash used in investing activities

(42,769)

(40,659)

Financing Activities

Dividends

(20,426)

-

Reduction of long-term debt

(30,073)

(5,000)

Net advances from (to) affiliates

(38,061)

18,793

Net change in short-term debt

44,000

(13,000)

    Net cash provided by (used in) financing activities

(44,560)

793

Net change in cash and cash equivalents

2,679

1,055

Cash and cash equivalents at beginning of period

1,440

2,818

Cash and Cash Equivalents at End of Period

$        4,119

$        3,873

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
ENERGEN CORPORATION AND ALABAMA GAS CORPORATION

The unaudited financial statements and notes should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 2003 and 2002, the three months ended December 31, 2001, and the year ended September 30, 2001, included in the 2003 Annual Report of Energen Corporation (the Company) and Alabama Gas Corporation (Alagasco) on Form 10-K. On December 5, 2001, the Board of Directors of the Company approved a change in the Company's fiscal year end from September 30 to December 31, effective January 1, 2002. A transition report was filed on Form 10-Q for the period October 1, 2001 to December 31, 2001. Alagasco has a September 30 fiscal year for rate-setting purposes (rate year) and reports on a calendar year for the Securities and Exchange Commission and all other financial accounting reporting purposes. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. The year-end consolidated condensed balance sheet data included in the interim report was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The Company's natural gas distribution business is seasonal in character and influenced by weather conditions. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year.

The quarterly information reflects the application of Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that gains and losses from the sale of certain oil and gas properties and write-downs of certain properties held-for-sale be reported as discontinued operations, with income or loss from operations of the associated properties reported as income or loss from discontinued operations in the current and prior periods. All other adjustments to the unaudited financial statements that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods have been recorded. Such adjustments consisted of normal recurring items. Certain reclassifications were made to conform prior years' financial statements to the current-quarter presentation.

The Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," prospectively for all stock-based employee compensation effective as of January 1, 2003. Awards under the Company's plan vest over periods ranging from one to four years. The cost related to stock-based employee compensation included in the determination of net income for the three months and nine months ended September 30, 2004 and 2003, approximates that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and diluted and basic earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

September 30,

September 30,

(in thousands)

2004

2003

2004

2003

Net income

As reported

$ 13,740

$11,896

$ 96,195

$89,824

Stock-based compensation expense included in reported net income, net of tax

1,853

857

4,397

2,216

Stock-based compensation expense determined under fair value based method, net of tax

(1,319)

(960)

(3,369)

(2,336)

Pro forma

$ 14,274

$ 11,793

$ 97,223

$89,704

Diluted earnings per average common share

As reported

$ 0.37

$ 0.33

$ 2.63

$ 2.53

Pro forma

$ 0.39

$ 0.33

$ 2.65

$ 2.52

Basic earnings per average common share

As reported

$ 0.38

$ 0.33

$ 2.66

$ 2.55

Pro forma

$ 0.39

$ 0.33

$ 2.68

$ 2.55

All of Alagasco's utility operations are conducted in the state of Alabama. Alagasco is subject to regulation by the Alabama Public Service Commission (APSC) which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983. RSE was extended with modifications in 2002, 1996, 1990, 1987 and 1985. On June 10, 2002, the APSC extended Alagasco's rate-setting methodology, RSE, without change, for a six-year period through January 1, 2008. Under the terms of that extension, RSE will continue after January 1, 2008, unless, after notice to the Company and a hearing, the Commission votes to either modify or discontinue its operation. Alagasco's allowed range of return on average equity remains 13.15 percent to 13.65 percent throughout the term of the order, subject to change in the event that the Commission, following a generic rate of return hearing, adjusts the equity returns of all major energy utilities operating under a similar methodology. Under RSE as extended, the APSC conducts quarterly reviews to determine, based on Alagasco's projections and year-to-date performance, whether Alagasco's return on average equity at the end of the rate year will be within the allowed range of return. Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each rate year, effective December 1, and cannot exceed 4 percent of prior-year revenues. As of September 30, 2003, Alagasco had a $3 million reduction in revenues to bring the return on average equity within the allowed range of return. RSE limits the utility's equity upon which a return is permitted to 60 percent of total capitalization and provides for certain cost control measures designed to monitor Alagasco's operations and maintenance (O&M) expense. Under an inflation-based cost control measurement established by the APSC, if the percentage change in O&M expense per customer falls within a range of 1.25 points above or below the pe rcentage change in the Consumer Price Index For All Urban Consumers (index range), no adjustment is required. If the change in O&M expense per customer exceeds the index range, three-quarters of the difference is returned to customers. To the extent the change is less than the index range, the utility benefits by one-half of the difference through future rate adjustments. The increase in O&M expense per customer was above the index range for the rate years ended September 30, 2004 and 2003; as a result, the utility returned to customers $1.2 million and $0.1 million, respectively, pre-tax through rate adjustments under the provisions of RSE. An $11.2 million and a $12.7 million annual increase in revenues became effective December 1, 2003 and 2002, respectively, under RSE.

Alagasco calculates a temperature adjustment to customers' monthly bills to substantially remove the effect of departures from normal temperatures on Alagasco's earnings. Adjustments to customers' bills are made in the same billing cycle in which the weather variation occurs. The temperature adjustment applies primarily to residential, small commercial and small industrial customers. Alagasco's rate schedules for natural gas distribution charges contain a Gas Supply Adjustment (GSA) rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply.

Energen Resources Corporation, Energen's oil and gas subsidiary, periodically enters into derivative commodity instruments that qualify as cash flow hedges under SFAS No. 133," Accounting for Derivative Instruments and Hedging Activities," to hedge its exposure to price fluctuations on oil, natural gas and natural gas liquids production. In addition, Alagasco periodically enters into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply. Such instruments typically include over-the-counter swaps, collars and basis hedges with major energy derivative product specialists. The counterparties to the commodity instruments are investment banks and energy-trading firms. In some contracts, the amount of credit allowed before collateral must be posted for out-of-the-money hedges varies depending on the credit rating of the Company.

Energen Resources applies SFAS No. 133 which requires all derivatives to be recognized on the balance sheet and measured at fair value. If a derivative is designated as a cash flow hedge, the effectiveness of the hedge, or the degree that the gain (loss) for the hedging instrument offsets the loss (gain) on the hedged item, is measured at each reporting period. The effective portion of the gain or loss on the derivative instrument is recognized in other comprehensive income (OCI) as a component of equity and subsequently reclassified into earnings as operating revenues when the forecasted transaction affects earnings. The ineffective portion of a derivative's change in fair value is required to be recognized in earnings immediately. Derivatives that do not qualify for hedge treatment under SFAS No. 133 must be recorded at fair value with gains or losses recognized in earnings in the period of change.

As of September 30, 2004, $55.4 million, net of tax, of deferred net losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified to operating revenues in earnings during the next 12-month period. The actual amounts that will be reclassified to earnings over the next year could vary materially from this amount due to changes in market conditions. Gains and losses on derivative instruments that are not accounted for as cash flow hedges as well as the ineffective portion of the change in fair value of derivatives accounted for as cash flow hedges, are included in operating revenues in the consolidated financial statements. For the ineffective portion of the change in fair value of der